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Department of Labor opens the door for ESG considerations

Pension fund fiduciaries can consider ESG factors in their investment decisions without worrying about repercussions from the Department of Labor, under new guidance announced Thursday by Labor Secretary Thomas Perez in New York.

A 2008 interpretative bulletin from the Labor Department “unduly discouraged plan fiduciaries” from considering environmental, social and governance factors under appropriate circumstances, Mr. Perez said in a statement. “Changes in the financial markets since that time, particularly improved metrics and tools allowing for better analyses of investments, make this the right time to clarify our position.”

Under the new guidance, Interpretive Bulletin 2015-01, fiduciaries cannot accept lower expected returns or greater risks, but may take ESG benefits into account as “tiebreakers” when investments are otherwise equal. When ESG factors have a direct relationship to the economic and financial value of an investment, “these factors are more than just tiebreakers,” a DOL statement said.

The announcement was welcomed by advocates of impact investing. Darren Walker, chairman of the National Advisory Board on Impact Investing, in a statement called it “a welcome step that will benefit both fund beneficiaries and society at large. A growing body of evidence shows that these factors directly and significantly impact financial returns on investments.”

US SIF CEO Lisa Woll, who joined Mr. Perez for the announcement, said the action “enables investment professionals to exercise their judgment and expertise in the service of beneficiaries without concerns about possible conflicts with ERISA. It clearly signals that ERISA-governed plans, and by extension, those plans influenced by ERISA, may integrate critical environmental, social and governance issues into their investment decisions.”

Audrey Choi, CEO of the Morgan Stanley (MS) Institute for Sustainable Investing, said the new guidance “opens the door for investors to think strategically about their long-term positions with a far richer data set.”